Cheapest-ever 10-year mortgage deals: what's the catch?
Britons have traditionally been wary of fixing their mortgages for as long as 10 years but their reluctance is being tested to the max.
Mortgage lenders are now offering astonishingly cheap decade-long deals, with rates below 3% and still falling.
If you lock into a 10-year fix, you can benefit from today's ultra-low interest rates all the way to the year 2025, regardless of what happens in the interim.
Should mortgage rates start rising rapidly in a year or two, it could prove the best financial decision you ever made. Even if rates rise only slowly, it is hard to see how you could lose out over the full term of the mortgage, given how far rates have fallen. Yet despite the benefits, most homeowners and buyers just can't bring themselves to commit for so long. Are they missing a trick?
Ten-year fixed mortgages have been available for years, without ever catching the public imagination. In 2004, the Miles Review said that encouraging borrowers to take out more long-term fixed rates would bring stability to the UK housing market by protecting borrowers from interest-rate swings.
There was another flurry of interest in 2007 after the then Prime Minister Gordon Brown publicly backed long-term fixes. Several smaller building societies, notably Leeds, Principality and Cheshire, all unveiled 10-year fixed rates but interest quickly fizzled out.
Sadly, anyone who took out one of these mortgages is likely to have regretted their decision after interest rates plunged in the wake of the financial crisis – and they still face another two years or so paying rates of at least 6%.
But the recent surge in 10-year fixed-rate deals has been far more convincing, as it has been led by big names such as Barclays, HSBC, Nationwide and Santander. Indeed, Moneyfacts recently counted 51 deals on the market, up from just 12 one year earlier.
There's another reason why the current upswing in interest should be taken seriously. Starting at around 3%, rates on these deals are half the level they were in 2007 and they keep falling all the time as lenders regularly leapfrog each other to top the best buy tables.
At the time of writing, Woolwich (Barclays' mortgage arm) has a deal charging 2.94% up to 60% LTV or 3.49% to 75% LTV, both with a £999 fee. First Direct recently topped the best-buy tables after launching a deal charging 2.89% to 65% LTV, plus a £950 fee. Soon after, Nationwide cut its 10-year fix to 2.89% at 60% LTV, or just 2.79% for existing customers. They were the cheapest deals on the market but only for seven days. Nationwide quickly withdrew them and hiked the rate for new customers to 3.29%.
However, Mark Harris, chief executive of mortgage broker SPF Private Clients, says the mortgage-rate war is well and truly raging. "A 10-year fix pegged at less than 3% is a phenomenal rate and if you can commit yourself for that length of time, you won't regret it."
Interest rates are almost certain to rise, he says. "Interest rates have been stuck at 0.5% for six years but they have to go up at some point, so securing a low rate for 10 years is likely to be a very good move indeed."
Early repayment charges
Harris is fielding a growing number of calls from customers interested in 10-year fixed rates, although many don't follow through. One deterrent is that you have to pay a hefty penalty if you decide to get out of the mortgage early, in the shape of early repayment changes (ERCs), which can run into thousands of pounds.
Barclays, for example, charges 6% off your balance until 31 March 2022, then 3% until 31 March 2015.
So if you decide to break out of the deal after, say, six years, and your mortgage balance is £150,000, the ERC is a punitive £9,000. If you decide to escape after nine years, you would still forfeit £4,500.
Harris says: "Unless people are committed, these kinds of figures really don't put them off."
If you are ready to commit, however, don't leave it too long. There are growing signs that ‘swap' rates, which are used to price fixed mortgages, are starting to creep upwards, Harris says.
"We don't expect 10-year fixes to become substantially cheaper. So if you can commit to a mortgage for 10 years, now may be the best time to do it."
Brian Murphy, head of lending at Mortgage Advice Bureau, says: "Many borrowers are reluctant to commit to a term of more than five years, particularly younger borrowers and families where changes in personal circumstances are more likely."
But some lenders do offer greater flexibility than others, notably TSB's Fix and Flex deal, which allows you to fix your mortgage for 10 years with the option to walk away after five years. It charges ERCs on a sliding scale, which starts at 5% in the first year, sliding to 4%, 3%, 2% and 1% in the subsequent four years. Thereafter, you pay nothing. TSB does charge a slight premium, 3.14% up to 60% LTV, but that may be worth it if you want more flexibility.
When considering a 10-year fix, check whether your deal offers full portability during the mortgage term, which means you can take it with you if you move home.
Simon Tyler, managing director of broker Tyler Mortgage Management, says portability is key and doesn't usually come with any punitive charges: "You only risk paying early redemption charges if you want to clear the loan completely ahead of schedule."
But be warned, you may still run into problems if, say, you need to borrow more money to trade upwards. There is no guarantee that your lender will grant you a larger loan, as it depends whether you meet its criteria at the time. Plus you will have to borrow the extra money at a higher rate of interest if rates have risen since you took out your original 10-year fix.
Tyler says that for many younger borrowers, the priority is to get the cheapest mortgage today, rather than locking into a low rate for tomorrow. "Although the gap between longer-term and short-term fixed rates has narrowed noticeably, you still pay more for a 10-year fix."
You can now take out a two-year fixed rate from Yorkshire Building Society charging an incredibly low 1.18% to 65% LTV, with a £1,369 fee. This looks irresistible but remember that after two years you revert to Yorkshire's standard variable rate, which is currently 4.99%.
You can remortgage to another deal at that point but if rates have risen by then, which is highly likely, it will cost you more. Plus you will also have to fund another set of arrangement fees and may have other remortgaging costs, such as legal fees. With a 10-year fix, there are no more arrangement fees or any other costs for a decade.
The time is right
David Hollingworth, broker at London & Country Mortgages, suggests there will never be a better time to take out a 10-year fix than now. "In the past, the margin between a short-term fix and a long-term fix was so large that most people chose cost over stability. Today, that margin has narrowed."
For example, First Direct's 10-year fix at 2.89% isn't much more expensive than Yorkshire Building Society's five-year fix at 2.24% to 65% LTV, plus £975 in fees but gives you an extra five years of guaranteed low rates.
Mortgage rates are at record lows and remain unlikely to go much lower. At some point, base rates or funding costs will rise, and mortgage costs will follow, Hollingworth says. "Locking into today's low rates means there is now almost zero risk of being stranded on an expensive fixed-rate while you helplessly watch mortgages get cheaper."
If you expect to move once or twice during a 10-year fix, fixing may look less tempting. Even if your deal is portable, things can go wrong. Or if you think that marriage, divorce, moving overseas or any other change in your personal circumstances may affect your borrowing requirements, again, you should think twice.
Hollingworth says: "On the other hand, long-term fixes would work powerfully for someone with 10 years remaining on their mortgage, and no plans to leave their home. Locking in would allow them to see out their mortgage without any nasty surprises."
Despite the current surge in new offerings, 10-year fixes are likely to remain a niche product. Most people are still wary about tying themselves up for such a long period.
Stephen Smith, director of the Legal & General Mortgage Club, says those who are fairly confident about their long- term circumstances should consider this opportunity: "If you're tempted, speak to an independent mortgage broker to understand which deal is right for you."
Despite today's amazing mortgage rates,most Britons are likely to remain commitment-phobes.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Early redemption charges
You may think a lender would be grateful to you for paying off your debts early. Alas, no. Mortgages and loans levy early repayment (or redemption) charges because the profitability of your loan or mortgage to the lender is calculated on the basis that you’ll pay every payment (see APR). To pay the loan/mortgage off early – even to remortgage – means the lender will make less profit and so claws back potential lost profit with an ERC, which could be three months’ interest. The earlier into the term you repay the loan, the higher the ERC might be.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.